Was Zynga’s Deal To Buy OMGPOP That Disastrous? Here’s Some Perspective.

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Draw Something, the game that could do no wrong now seems like it can do little right, at least according to the blogosphere. There’s been a string of stories from virtually everyone saying that the OMGPOP acquisition is “haunting” Zynga because Draw Something’s daily active usage is down to 9.1 million daily active users from its peak of 14.6 million daily active users.

2) Games usually peak and then taper off in usage. But revenue sometimes goes in the opposite direction with optimization and improvement (like with Farmville). Zynga probably knows the natural lifecycle of freemium game better than most other companies.Games peak early and then taper down over long stretches of time.

Even hit games often contribute the majority of their revenue to the company after they peak. Farmville was still Zynga’s top game by revenue last quarter even though it’s several years old. It made up 29 percent of the company’s online game revenue, followed by Cityville which had a 17 percent share, according to an SEC filing today.

True, mobile is a little bit different. The titles that were first to market like Angry Birds and Zeptolab’s Cut The Rope, have managed to last longer than your typical social game on the Facebook. There are also exceptions like Words With Friends, which has a very unusual curve and Zynga Poker. But life cycles for mobile games are getting shorter every quarter.

3) OMGPOP’s price may seem high, but the deal was far from the most aggressively priced one in recent social gaming memory.

Remember when Disney paid up to $763.2 million for social gaming startup Playdom in 2010? At Playdom’s peak, the company had 7.3 million daily active users. When the deal finally closed, they had about 5 million. Even if you exclude the $200 million earnout, Disney paid more than three times as much as Zynga did for one-half of the daily active users. And that’s factoring in Draw Something’s recent declines. (Note: We used to have a chart of Playdom’s aggregate daily active users in this story, but we had to take it out per requests from AppData’s owner Inside Network).

OMGPOP had peak usage of 14.6 million users every day. Up until now, Ngmoco has mostly been a source of costs for its Japanese parent as it only launched its Android-based mobile gaming network last fall. If they start materially adding to revenues, it won’t be until now or later in the year, two years after they were acquired.

4) There are a lot of other conflating factors that have driven the stock downward over the past few months:

The lock-up period for Zynga’s employees ended a week ago, so now the company’s rank-and-file can sell their holdings. Pincus himself sold close to $200 million in stock at the beginning of last month through a secondary offering. Both Pandora and LinkedIn, which went public last year, matched or found new lows when they hit their critical lock-up dates.

Maybe there are some underlying concerns about where Zynga will find new growth as the company’s business on Facebook seems mature. Draw Something might tie a little bit into that as it’s part of Zynga’s mobile strategy, but it’s not just the game itself. It’s hard to envision a gaming business on iOS or Android that has the market share that Zynga has on Facebook. Furthermore, many standalone Android or iOS gaming companies trade or have been sold at somewhere between $200 million and 400 million.

At a $5.89 billion market cap, Zynga is aggressively priced for growth and is worth about four times its projected revenues this year. Meanwhile, Electronic Arts trades at not much more than what it will bring in revenue for this year. Zynga is also changing a lot internally as early employees, many of whom didn’t have a genuine gaming background, phase out. The company is now pulling in a lot of EA’s middle management. That could bring some creative firepower but it could also create internal culture clash.

But OMGPOP? That’s just one game. And the title’s decline, while fast, mirrors what you see with other hit games.

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CrunchBase

OverviewZynga was founded in July 2007 by Mark Pincus and is named for his late American Bulldog, Zinga. Loyal and spirited, Zinga's name is a nod to a legendary African warrior queen. The early supporting founding team included Eric Schiermeyer, Michael Luxton, Justin Waldron, Kyle Stewart, Scott Dale, John Doerr, Steve Schoettler, Kevin Hagan, and Andrew Trader.
Zynga's mission is connecting the …

OverviewOMGPOP (formerly known as iminlikewithyou) developer and publisher of multiplayer, social and mobile games.
The Company started in 2006 as iminlikewithyou, a place for people to play games to meet each other and in 2009 changed its name to the shorter OMGPOP where people meet each other to play games. It launched OMGPOP.com at that time.
The company has generated about 1 Billion game plays to date.
It …